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Lugenbuhl Updates: CARES Act Modifications to the Subchapter V Small Business Debtor Bankruptcy Provisions of the Bankruptcy Code

04/03/2020

By Christopher Caplinger and Coleman Torrans

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed by Congress on March 27, 2020, and was shortly thereafter signed into law by the President. The CARES Act included changes to the recently enacted subchapter V, small business debtor provisions of the Bankruptcy Code. Most significantly, by altering the threshold for who can file, the CARES Act dramatically increases the availability of the small business debtor bankruptcy case to distressed businesses.

Specifically, the CARES Act included multiple temporary modifications to the provisions of the Small Business Reorganization Act of 2019 (the “SBRA”), which created the new subchapter V.  The SBRA is itself recent; it was signed into law on August 23, 2019 and became effective on February 19, 2020. The most significant modification of subchapter V by the CARES Act is that it temporarily increases the eligibility threshold for businesses filing under subchapter V from $2,725,625 to $7,500,000. The threshold is currently scheduled revert back to the $2,725,625 limit in March 2021. This modification should dramatically increase the number of small businesses which are eligible to take advantage of the new subchapter V of the Bankruptcy Code.

The SBRA was enacted to address the perceived difficulties of chapter 11 for small businesses, particularly, procedural roadblocks and high costs. One of the primary obstacles to confirmation of reorganization plans for small businesses has been the absolute priority rule. This rule, still applying in non-small business chapter 11 cases, blocks plan confirmation if the owners of the business would maintain their ownership position, unless unsecured creditors would recover completely or agree to receive less than 100 percent recovery. Previously, if the small business debtor could not satisfy the absolute-priority rule, the plan—and the bankruptcy case—would fail, or the owners would likely have to surrender their stake in the business. The SBRA eliminated this rule in small business cases. Now, instead of worrying about the absolute priority rule, the primary concerns for counsel representing a small business debtor should be: (1) what are the goals of the business, and (2) is there a credible cash flow to achieve those goals? Thus, the SBRA allows options to debtors and their counsel not previously available under the Bankruptcy Code.

The SBRA also included provisions that could dramatically reduce the costs associated with a chapter 11 case. First, the timeline of the subchapter V case is expedited because a plan must generally be filed within 90 days of commencement. A shorter bankruptcy case is generally a less expensive bankruptcy case. Second, the new subchapter V provides that only the small business debtor can file a plan, thereby eliminates the possibility of competing creditor plans and the additional expenses that accompany litigating which plan is best. Additionally, subchapter V almost eliminates the possibility of appointment of unsecured creditor committees, which often dramatically increase the costs of a bankruptcy case. Instead, in subchapter V cases, a standing trustee will be appointed to monitor and advise the debtor and to ensure that the reorganization stays on track. Finally, reporting requirements are streamlined and there are no quarterly fees due to the Office of the United States Trustee in a subchapter V case.

Accordingly, the benefits to business owners of filing a chapter 11 case under subchapter V are significant. And with enactment of the CARES Act, many more debtors will have subchapter V as a potential avenue for restructuring.

 

Lugenbuhl is closely monitoring this fluid situation as it develops and will provide updates as they become available. Until then, individuals or businesses in need of guidance should contact Lugenbuhl for support.

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